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Living Wage or Minimum Wage? Profits or People?

Minimum wage has been a topic gaining traction over the last several years, with campaigns like the Fight for $15 helping create awareness. Proponents of raising the minimum wage say it needs to be a livable wage (a wage high enough to maintain a normal standard of living), which many of the current minimum wages are not. Opponents of the movement argue it will cripple the economy and create havoc in the market place, leaving the working class in even worse shape. So which side has more evidence supporting their argument? What approaches are individual states prepared to try?

Background
The first U.S. minimum wage was instituted under the Fair Labor Standards Act of 1938. Since then, Congress has changed who is covered under it and raised the minimum wage a number of times. Minimum wage laws are put in place in order to set the lowest hourly rate an employer can legally pay their employees. Currently, the federal minimum wage is $7.25 an hour, for tipped workers it’s $2.13 an hour. A number of states and municipalities have enacted higher minimum wages than the federal rate, which employers in those areas are required to pay. Minimum wage does not pertain to all companies, only those that make more than $500,000 in annual gross sales and interstate commerce employers. Because the minimum wage is not adjusted automatically for inflation, its real value in the market place falls between enacted increases.Here is a graph of the “value” of minimum wage, taking into account inflation, since 1947.

Economic Impact

There are some intuitive downsides to increasing the minimum wage; such as fewer workers hired, fewer hours of work given to workers, transferral of higher wage cost onto customers through higher prices or companies realizing lower profits to absorb the higher cost. Companies like McDonald’s and Wendy’s have announced they will be replacing cashiers with touch-screen ordering systems to cut the cost of higher minimum wage in areas around the county. Walmart is closing stores and not entering new markets in cities/states that have already passed higher minimum wage laws. Small businesses are struggling with the wage increases as well, Anie Duquette, of Williamsburg Market, stated, “We’re struggling with the new minimum wage, because people don’t understand that every time you raise the minimum wage, it also raises your workman’s comp insurance, it raises everything else too. It’s not just the minimum wage that goes up.”

The downsides seems clear enough; it’s not a surprise so many companies are acting on them. But are the downsides described above always real? Some companies, like Ikea, have seen tremendous success through raising their minimum wage. Since raising their minimum wage to $12 an hour, they have seen less turnover (meaning they are spending less on recruiting and training), more qualified job seekers in the stores and they opened two new locations (Merriam, KS and Miami, FL). Some think that higher compensation leads to more productive workers, among other benefits. It is clear that increased minimum wage increases overall wage costs to a company, but how does it affect overall profits? Figuring out the total impact of raising wages is extremely complex, since there are so many variables involved and many of them are hard to quantify.

But there are two arguments, really. One is the economic argument, about if raising minimum wage will help or hurt the economy at large. If you feel the evidence shows that raising the minimum wage would boost the economy and help workers, then it seems a pretty straight forward argument that we should do it. If you think raising the minimum wage would displace a large number of workers by hurting companies enough to force them to downsize or even put them out of business, then raising the minimum wage is a terrible idea. Obviously there is a lot of disagreement on these points. But there is another question too, a more philosophical one, which is squarely in our sights coming into this presidential election. What is the role of government in our lives and is it even possible for government to ensure everyone willing to work can make a “living wage”?

Living Wage

A recent post from a paramedic, who makes $15 an hour, went viral stating “Look, if any job is going to take up someone’s life, it deserves a living wage. If a job exists and you have to hire someone to do it, they deserve a living wage.” The concept of “living wage” is interesting. The paramedic, Jens Rushing, stated only around 12% of the people who work minimum wage jobs are teenagers, despite the impression the general public has that these jobs are mostly worked by teenagers. Here is a graphic that details the population of people who work minimum wage jobs, showcasing that most of the population who works minimum wage jobs are not under the age of 20.

What this means is most people in minimum wage jobs are indeed trying to make a living; they are supporting themselves and often supporting or helping support other people. On a base rate of $7.25 an hour, that is nearly impossible. Dan Emmanuel, a research analyst with the National Low Income Housing Coalition, wrote “Raising the minimum wage is a critical part of addressing the housing affordability. However, there is another part to this problem, which is the shortage of affordable housing. Specifically, there is a shortage of 7.2 million rental units affordable and available to the lowest-income households. We need to address both issues in order to tackle the affordable housing crisis.” In Pennsylvania, you need to work roughly 101 hours a week to be able to afford a modest two-bedroom apartment if you make minimum wage. Here is a graph showcasing the hours needed to work per week to afford a one-bedroom unit in states around the US.

Higher ends of this spectrum include 124 hours in Hawaii and 105 in Virginia, the lowest number is Puerto Rico with 44 hours and West Virginia with 49 and South Dakota and Nebraska with 50 hours per week. Each week has 168 total hours, if you lived in Hawaii you would spend 73.8% percent of your life at work to afford your rent. This is a real issue for many Americans throughout the United States.

The Bills

Not surprisingly, given the disagreement on the impact raising minimum wage has on the economy, there are bills that range from encouraging higher wages to limiting cities’ ability to raise wage if it is not state approved.

California’s SB 3 was the leader in adopting the “Fight for $15”. Through SB 3, the minimum wage will increase to $10.50 an hour on January 1, $11 an hour in January of 2018, then dollar-per-year increases would follow until 2022. The deal will affect approximately 118,000 California workers. Businesses that employ fewer than 25 workers will have an extra year to pay workers $15 an hour.

Florida’s SB 6 would set the wage at $10.31 and increase it $1 yearly until livable. Their mayor, Philip Levine, stated, “We continue to hear stories from our residents who are unable to live and work in Miami Beach because of the high costs of rent, transportation and basic living costs. But today, we start addressing this growing problem through higher wages by establishing a citywide minimum living wage.”

New York introduced A 7257 that increases minimum wage along with establishing paid family leave for New York workers. Oregon, New Jersey and Minnesota all had bills aimed at raising their wages. Here is an interactive map showing various current bills around the country discussing increasing the minimum wage, studying the potential impact of raising the minimum wage, suggesting ways to calculate what the minimum wage should be, or calling on Congress to raise the federal minimum wage:

On the other side, Alabama’s HB 174 was introduced to prohibit local governmental entities from requiring minimum wage or other benefits. The Missouri Senate voted to override Gov. Jay Nixon’s veto of last year’s MO HB722 that would have forbid Kansas City and other local municipalities from increasing the minimum wage above the $7.65 an hour statewide rate. After the override, Kansas City Mayor Sly James stated, “Today is a loss for accountable, local governing. I hope when voters realize the state took away their ability to improve their cities and the lives of the people who live in them, they will use their frustration to take on the legislators who abandoned them.” Because the Senate and House voted to override the veto, the bill will become law.

Conclusion

The Political Gabfest podcast (starting around minute 24:00) recently brought up interesting points on the theories behind minimum wage increase, the Fair Standard Labor Act and getting more money to people who do not have advanced degrees or lower income. Discussing the trade-offs and effects of raising the minimum wage, it brings up great points to both “sides” of this debate. They speaks to the traditional presumption that you can increase your earning ability as you get older by acquiring and developing more and better sets of skills for the purpose of using them for bargaining power. Each of us must develop our own strengths to have something to leverage to make more money. But people who do not have advanced degrees are less likely to be in positions to develop these skills and use them as bargaining power, and unions have by and large disappeared and no longer serve that function for blue collar workers, how do we help them get more money? The Gabfest group brings up a very good point in my opinion: simply raising the minimum wage isn’t addressing the problem of why someone cannot have that bargaining power we are striving for. It is more (in my own words) throwing money at the problem and hoping it will get better.

Perhaps directly addressing problems like limited access to health care, shortage of affordable housing, and increasingly expensive higher education, is where we should set our focus. For example, we cannot blame fast-food chains for implementing automated systems to avoid paying the minimum wage. Their mission is to cut costs to lower cost of food, so really no matter what the minimum wage, fast food would always have been headed toward automation. In other words, raising the minimum wage might only be a temporary fix anyway. Taking on the problems caused by low wages from another angle might be more practical.

And really, as contentious as the minimum wage conversation is, maybe we might as well be discussing a minimum income instead.